Euro weakened broadly last week as traders responded negatively to ECB's decision to extend QE with tapering. Nonetheless, the common currency was underachieved by Yen and then Sterling. Yen ended as the weakest major currency as recent selloff continued on surging stocks and yields. Meanwhile, the British Pound followed as the second weakest as recent rebound lost momentum and weighed down by Brexit worries. Canadian Dollar ended as the strongest one as oil priced stayed firm after retreating briefly through 50 handle. Dollar ended as the second strongest one, as boosted by performance in stocks and treasury yields. And the greenback is followed by Aussie and Kiwi.
ECB surprised the market by announcing tapering plan for its bond purchases program. The Governing Council decided to extend the program until December 2017. However, the pace would slow down to 60B euro per month from April 2017, compared with the current 80B euro. Despite disappointing in first sight, the ECB has indeed delivered more than the market had anticipated: 9 months*60B euro = 540B euro vs consensus of 6 months*80B euro = 480b euro. More in ECB Extends QE but Tapers Size. Also, the act is seen to give ECB more flexibility to extend the program even further. In particular, ECB staff projected inflation to be at 1.7% in 2019, still staying below the 2% target. And Europe as a whole would face more political risks in 2017.
Market's focus will turn to FOMC meeting this week. Fed is widely expected to hike federal funds rate by 25bps to 0.75%. There are talks that due to Donald Trump's expansive fiscal policies, Fed could hike at a faster pace next year. Fed fund futures are pricing more than 50% chance of another hike by June. Fed will release updated economic projections this week. That include the so-called "dot-plot" while indicates policymakers' expectation on the rate path. The greenback could be give another boost if the dot-plot also showed faster hike next year. Also, BoE and SNB will meet this week and markets expect no change from these central banks.
Expectation of an expansive fiscal policy in US boosted stocks to new record high. DJIA picked up upside moment again and surged to close at 19756.85, up 586.43 pts or 3.1%. The long term up trend is still in a phase of strong momentum and should extend through 20000 handle, possibly this week. The next medium term target is 61.8% projection of 10404.49 to 18351.36 from 15450.56 at 20361.72. S&P 500 and NASDAQ also surged to close at new record high at 2259.53 and 5444.50 respectively.
Long term treasury yield also showed sign of up trend resumption. 10-year yield rebounded strongly on Friday to close at 2.464 but was held below resistance high at 2.492. Break of 2.492 could be seen this week, and that would possibly bring decisive break of 2.486 key long term resistance. Meanwhile, 30-year yield took that lead and took out recent high and closed at 3.154. Rise from 2.102 should have resumed for next key cluster resistance at 3.255 (61.8% retracement of 3.976 to 2.102 at 3.260). We'd be a bit cautious on topping there. But decisive break there will provide another evidence of strong underlying momentum in long term yields.
Dollar index's strong rebound indicates that pull back from 102.05 should have completed at 99.43, above 99.11 resistance turned support and 55 days EMA. The development suggests that the larger up trend could be resuming immediate focus will be 102.05 resistance this week. Decisive break there will target next projection level at 61.8% projection of 78.9 to 100.39 from 91.91 at 105.19. The development in stocks and yield, together with Fed's new economic projection would be critical for the greenback.
Regarding trading strategy, we had two short positions in AUD/USD. We closed one last week at 0.7441 ( entered at 0.7480), with a slight profit. We're holding on to the short position entered at 0.7550. The stronger and longer than expected recovered made our view shaky. But still, we're still favoring the case that medium term consolidation pattern from 0.6826 low should have completed and the larger down trend is ready to resume. Hence we'd expect a break of 0.7310 soon to 0.7144 support as first target and 0.6826 as the second target. We'll keep a stop at 0.7550.
In addition, we're expecting post ECB weakness in Euro to continue. EUR/USD's rejection from 55 days EMA affirmed underlying bearishness. And indeed, we believe that the medium term consolidation from 1.0416 has completed at 1.1298. And the larger down trend is resuming. Hence, we will sell EUR/USD on break of 1.0504 this week, with a tight stop at 1.0629. Decisive break of 1.0461 key support level will pave the way to 0.9115 projection level in medium term.